Here's Why Shree Tirupati Balajee FIBC (NSE:TIRUPATI) Can Manage Its Debt Responsibly

Stock Analysis

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Shree Tirupati Balajee FIBC Limited (NSE:TIRUPATI) does carry debt. But should shareholders be worried about its use of debt?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Shree Tirupati Balajee FIBC

The chart below, which you can click on for greater detail, shows that Shree Tirupati Balajee FIBC had ₹475.7m in debt in March 2023; about the same as the year before. Net debt is about the same, since the it doesn't have much cash.

We can see from the most recent balance sheet that Shree Tirupati Balajee FIBC had liabilities of ₹356.6m falling due within a year, and liabilities of ₹183.5m due beyond that. Offsetting these obligations, it had cash of ₹5.78m as well as receivables valued at ₹356.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹177.5m.

Of course, Shree Tirupati Balajee FIBC has a market capitalization of ₹1.24b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Shree Tirupati Balajee FIBC's debt is 3.0 times its EBITDA, and its EBIT cover its interest expense 4.7 times over. This suggests that while the debt levels are significant, we'd stop short of calling them problematic. Also relevant is that Shree Tirupati Balajee FIBC has grown its EBIT by a very respectable 29% in the last year, thus enhancing its ability to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Shree Tirupati Balajee FIBC's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, Shree Tirupati Balajee FIBC saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Based on what we've seen Shree Tirupati Balajee FIBC is not finding it easy, given its conversion of EBIT to free cash flow, but the other factors we considered give us cause to be optimistic. In particular, we are dazzled with its EBIT growth rate. When we consider all the factors mentioned above, we do feel a bit cautious about Shree Tirupati Balajee FIBC's use of debt. While we appreciate debt can enhance returns on equity, we'd suggest that shareholders keep close watch on its debt levels, lest they increase. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Shree Tirupati Balajee FIBC is showing 3 warning signs in our investment analysis , and 2 of those shouldn't be ignored...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

Find out whether Shree Tirupati Balajee FIBC is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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Shree Tirupati Balajee FIBC Limited manufactures and supplies flexible intermediate bulk container (FIBC) bags in India.

Solid track record with adequate balance sheet.